Magazine

Giving It the Old Online Try

December 02, 2001

The dot-com bubble may have burst in the world of commerce, but the promise of harnessing the Internet for paradigm-changing growth--and even profits--still thrives in the halls of academia. At the University of Maryland University College, enrollment in courses offered over the Net soared to 63,000 in the past academic year, up 50% from the year before. UMUC students can now earn some 70 degrees and certificates entirely online. The University of Phoenix Online, a subsidiary of the nation's largest for-profit university, saw revenues jump some 76% in the fiscal year ended Aug. 31, to $181 million, while profits grew 82%, to $32 million. The stellar results have driven up Phoenix Online shares by 80% since its parent, Apollo Group Inc., floated the unit as a tracking stock last year.

Since the U.S. Army began rolling out an e-learning program in January, 10,400 soldiers are taking courses and earning degrees online from 24 participating colleges. Students at eArmyU, as it's known, receive a free laptop and printer and 100% of their tuition. No wonder the Army expects enrollment to hit 80,000 by 2005 as it takes the program Army-wide.

Nearly two years after the dot-com fizzle began, e-learning has emerged from the wreckage as one of the Internet's most useful applications. Nearly half of the 4,000 major colleges and universities in the U.S. now offer courses over the Internet or use the Web to enhance campus classes, according to market researcher International Data Corp. About 2 million students take online courses from U.S. higher-ed institutions, and their ranks could swell to 5 million by 2006, estimates John G. Flores, head of the U.S. Distance Learning Assn., a nonprofit trade group outside Boston (charts). And it's not just a U.S. phenomenon: Students from developing countries are jumping online, too.

These courses are opening new horizons for the fastest-growing segment of higher education: working adults, who often find it difficult to juggle conventional classes with jobs and families. Adults over 25 now represent nearly half of higher-ed students; most are employed and want more education to advance their careers.

E-learning is an influence in the traditional college class as well. Online classes won't replace the college experience for most 18-to-24-year-olds. But from the Massachusetts Institute of Technology to Wake Forest University in North Carolina, colleges are using the Web in on-campus classes to augment textbooks and boost communication.

There are still plenty of hurdles to clear before the e-learning world can take off. For one thing, most of the success is with established universities, like UMUC, which can leverage their brand names to reach out to working adults. The for-profit startups, by contrast, have struggled with accreditation and poor name recognition. Many have fallen by the wayside, including BigWords.com (AMZN), an Amazon-like purveyor of textbooks, while only a handful make money, like Phoenix Online.

MASS MARKET? Quality is a problem, too, which is a key reason why many online students drop out. That will force a further shakeout, eliminating mediocre players. Many colleges also are still grappling with such issues as how much time their faculty should devote to e-teaching. And long-established rules make it difficult for online students to get financial aid. Even as these problems are resolved, "online learning will never be as good as face-to-face instruction," argues Andy DiPaolo, director of the Stanford Center for Professional Development, which offers online graduate courses to engineers.

Still, spending on higher-ed e-learning technology will more than double by 2005, says Eduventures.com, a Boston-based education market researcher. The current economic slump could even spur enrollments, economists say, since many workers look to retool during downturns. Within four or five years, online universities could be among the largest higher-ed providers, says Andrew Rosen, chief operating officer of test-prep king Kaplan Inc. (WPO), which has several online colleges, including Concord Law School, the largest virtual law program, with 800 students.

Ultimately, the greatest e-learning market may lie in the developing world, where the population of college-age students will explode in coming years. Just as cell phones leapfrogged land-based telephones in many developing countries, so may e-learning help to educate the masses in countries that lack the colleges to meet demand--and can't afford to build them.

ROAD WORK. Looking way out, as far as midcentury, e-learning could "become the environment in which the majority of human beings are educated beyond the secondary level," asserts University of Melbourne President Alan Gilbert. His school, along with Canada's McGill University and more than a dozen other universities, is part of U21 Global, a virtual university being created through a joint venture with textbook giant Thomson Learning. It aims to enroll 100,000 students by the decade's end, mostly in Asia.

Meanwhile, e-learning demand in the U.S. is rising, driven by higher education's changing demographics. Take Dr. Michael Kaner, a 43-year-old dentist in suburban Philadelphia who's halfway through adding a law degree to his credentials. Attending a night program at an area law school wasn't practical, he says, since it would have required 12 hours of commuting a week. So in 1999, Kaner signed up for Kaplan's Concord law program. Although the courses require 25 to 30 hours a week, there's no commute and he studies when it suits him. "This is the only way I could pursue a law degree," says Kaner, who hopes to build a part-time legal practice specializing in dental issues.

Similarly, Judy Rowe, who dropped out of college in the 1960s after running out of money, was able to earn a bachelor's degree in psychology from UMUC last year while working as a flight attendant for American Airlines Inc. "I took my laptop with me and did my assignments on the road," says Rowe, who's now thinking about a second career in psychology.

COST-EFFECTIVE. E-learning is also a good fit with the military, where frequent transfers make it hard to pursue a degree. Last year, the Army awarded PWC Consulting a $453 million, five-year contract to create an electronic university that allows soldiers to be anywhere and study at Kansas State University or any of the 24 colleges involved in the program.

eArmyU already has changed the perspective of soldiers like Sergeant Jeremy Dellinger, 22, who had been planning to leave the Army to go back to school when his basic enlistment ends. Then he enrolled in eArmyU to earn his bachelor's degree from Troy State University in Alabama. "Now I can get my degree and still do the work I love" as a supply sergeant, says the Fort Benning (Ga.)-based soldier. Like Dellinger, about 15% of those who have signed up so far have reenlisted or extended their tours. By cutting turnover, "eArmyU could almost pay for itself," says program director Lee Harvey, since it costs nearly $70,000 to train green recruits.

Corporations, too, see e-learning as a cost-effective way to get better-educated employees. Indeed, corporate spending on e-learning is expected to more than quadruple by 2005, to $18 billion, estimates IDC. At IBM (IBM), some 200,000 employees received education or training online last year, and 75% of the company's Basic Blue course for new managers is online. The move cut IBM's training bill by $350 million last year, because online courses don't require travel.

Even as online higher ed catches on, however, few private-sector providers are turning a profit. During the boom years, venture capitalists pumped some $5 billion into e-learning companies, says Adam Newman, a senior analyst at Eduventures.com. Roughly $1 billion went to companies that have already flamed out, he says. Beyond Phoenix, probably only half a dozen companies are making money now. Lack of name recognition is the biggest problem for companies like Capella, Jones International, and Cardean, UNext's virtual campus. And winning accreditation--crucial for attracting students--is tough going, too. It took Capella five years to make the grade; Jones waited four years. Concord's grads can sit for the California Bar Exam, but the American Bar Assn. still hasn't granted it accreditation.

CAUTIOUS ELITES. Even Phoenix Online, which has piggybacked on the fame of the bricks-and-mortar University of Phoenix, lost millions in its first six years, says Todd S. Nelson, CEO of parent Apollo Group. To hold students, Phoenix Online keeps classes small and insists on student involvement. "I had to sign on five of every seven nights," says Martin J. Boyle, the owner of a New Jersey-based security company who earned a Phoenix Online MBA last year.

Phoenix Online aside, the big e-learning winners so far are the traditional nonprofit universities. They have captured nearly 95% of online enrollments, figures A. Frank Mayadas, head of e-learning grants at the Alfred P. Sloan Foundation. Most active are state and community colleges that started with strong brand names, a faculty, and accreditation, says Mayadas, as well as a tradition of extension programs.

By contrast, many elite universities have been far more cautious about diluting the value of their name. Harvard Business School believes it would be impossible to replicate its classroom education online. "We will never offer a Harvard MBA online," vows professor W. Earl Sasser, chairman of HBS Interactive, which instead develops e-learning programs for companies. Similarly, last year the MIT faculty nixed teaching classes online, fearing "it would detract from the residential experience," says former faculty chair Steven Lerman.

That didn't stop MIT from embracing the Internet in a different way. Over the next five years, MIT plans to post lecture notes and reading assignments for most of its 2,000 courses on the Web for free, calling the effort "OpenCourseWare." Lerman says "it's a service to the world," but he says it's no substitute for actual teaching, so faculty aren't worried about a threat to classroom learning.

A few other top schools see profitmaking opportunities. Since 1996, Duke University's Fuqua School of Business has been offering MBAs for working executives. In these blended programs, some 65% of the work is done online and just 35% in classes held during required residencies that consume 9 to 11 weeks over two years. Duke charges up to $90,000 for these programs--vs. $60,000 for its traditional residential MBA. Yet they have been so popular that by next year, "we'll have more students in nontraditional programs than the daytime program," says Fuqua Dean Douglas T. Breeden. The extra revenues are helping Fuqua to double its faculty.

"MORE ENGAGED." Even colleges not pursuing online courses are integrating the Internet into everyday campus life. Professors are using everything from digital reference works to Web-based tutors to augment textbooks. Colleges are rethinking classroom instruction, too. MIT has redesigned a semester of its mandatory undergrad physics course, replacing an impersonal lecture to more than 100 with lively sessions in which groups of three students with laptops solve problems posed by the professor. At Wake Forest, where all students receive laptops, Vice-President David G. Brown asks students in his freshman seminar to e-mail drafts of their papers to two fellow students, plus one of six alumni Brown has recruited to provide comments. Brown then e-mails papers, with his comments, to all students. "Students are more engaged," says Brown.

Change comes slowly to higher education, but e-learning has revved up the pace. Even if it takes years to fully take hold, it has already achieved one oft-cited goal of the knowledge economy--getting more adults to study throughout their working lives. By William C. Symonds in Boston